The Credit Crunch Now Effecting Individual Credit Scores

As if steadily increasing foreclosure rates and falling home values weren't enough, the subprime mess has begun to spill over into other areas of the financial sector. Credit card issuers are now starting to get their risk exposure in check (which would otherwise be a good thing), but if issuers cut down credit limits substantially consumers could be effected in an unintended way.

FICO scores - individual credit score that gives lenders a rough estimate of how much of a risk you are - are based in part on your credit utilization rate. This means, if a credit card issuer cuts your available credit in half, that will have an effect on your utilization rate -- at FICO score as a whole. For example, say you have a credit card balance of $4,000 and credit line of $10,000, if Discover drops your credit line to $5,000. Assuming you have no other cards, your utilization ratio has rose from 40% to 80% overnight. Additionally, card issuers have begun to raise interest rates from bad to ugly. You already know this -- but, there's even more incentive now to pay down credit card debt. Unless you have some payday or auto title loans floating around, the credit card debt should be priority #1. There are few other investments that you can make a 29% return on your investment, and that doesn't even include fees that card issuers tack on each month.

It should be noted, that credit utilization accounts for about 30% of your FICO score. The most important factor in your credit score remains your payment history, which makes up 35%. The rest of your score is calculated by weighting your credit history (15%), types of credit (10%), and new credit (10%).